Both belong in the depot: VW or Tesla – this is not an alternative

Saturday 20th March 2021

Both belong in the depot
VW or Tesla – this is not an alternative

From Stefan Schaaf

VW shares are catching up, Tesla's electric star is falling. There are hot bets on the stock market that the Wolfsburg-based company will succeed in opening up the mass market for electromobility. Who should investors choose now?

Cars are a highly emotional affair, and some people even use them to define their personality. It doesn't get much more rational when the discussion revolves around auto stocks. There are outspoken fan boys for the shares of the electric car pioneer Tesla, who respond with angry tirades to any criticism of "their" future shares. And there is the other faction that considers e-mobility to be nonsense and firmly swears by today's diesel manufacturers.

The second group should feel confirmed these days: Because the old-economy icon Volkswagen is, and this picture must appear once in this text, is about to overtake the stock market. But the diesel fans now have to be very brave: The soaring of the Volkswagen share is mainly due to the fact that the Wolfsburg-based company is opening up the market for e-cars – and investors are starting to honor this. Investors are asking themselves: Is Volkswagen the better Tesla?

It wasn't long ago that the answer was clearly no. After the diesel scandal and in view of Tesla's successes, Volkswagen seemed morally, technically and financially on the ground. But now, a few years later, not only have the major diesel fines been paid, the company has also invested billions in e-mobility. This is now producing success: the number of registrations for cars such as the ID.3, the E-Golf or the Audi E-Tron is increasing – at least on the home market. In the previous year, the share of electrically powered cars and hybrid vehicles (plug-in) was eleven percent of the cars sold by the Group. Viewed worldwide, the 232,000 pure e-cars and 190,000 plug-in hybrids delivered by the group are still lost in the 9.3 million cars delivered in the previous year.

VW promises – and can deliver

But the stock market is not interested in the past, it trades in the future. And in the opinion of investors at Volkswagen, that is rosy. The fact that the group had announced a further increase in sales of e-cars on Tuesday may also have contributed to this assessment. CEO Herbert Diess, who is said to have a friendly relationship with Tesla boss Elon Musk, wants to bring ten more e-models from five brands onto the market this year. In 2021, the group wants to double its sales of e-cars to around 450,000 units.

In addition, the Wolfsburg-based company can also manufacture the cars. "Producing high volumes with constant quality is the core of automobile production, the hardware has to be right," says David Wehner, senior portfolio strategist at asset manager Do Investment, "Capital". "Volkswagen has mastered that. The group also has a global sales and service network." Wehner sees some catching up to do with Tesla, especially in terms of software, because the Musk company is ultimately "a software company that happens to produce cars". If Volkswagen closes this gap and increases the vertical range of manufacture in the field of e-mobility, the group has "the potential to become the better Tesla in the field of e-automobiles".

Investors like the growth prospects. Nevertheless, VW's jump in price over the past few days is impressive. The preferred share listed in the Dax has already gained a good 50 percent in value this year and shot up by 11 percent on Wednesday alone. On Thursday it reached 250 euros, the highest value in about five years. Volkswagen was thus valued at 137.8 billion euros on the stock exchange (all data from Refinitiv), making the Wolfsburg-based company again the most valuable listed company from Germany. The SAP, which has been flagging for months and which has led the Dax for years, has to be content with 120.7 billion euros and rank two. A little behind is the industrial gases group Linde with around 117 billion euros, although it has been based in the low-tax country of Ireland since the merger with Praxair. Volkswagen was the Bloomberg news agency six years ago before the diesel scandal became known at the top of the Dax.

Tesla cannot keep up with the current VW price gains, the share has lost 0.6 percent in value this year. Nevertheless, the group is still around four times as expensive as Volkswagen on the stock exchange with 673.6 billion dollars (566 billion euros). However, this has its price, and that's called overvaluation. Tesla stock, which currently costs just under $ 702, is valued at a price / earnings ratio of 1128, so one dollar stock value equates to discounted future earnings of 1128 dollars. At Volkswagen, the P / E ratio is 13.9 and thus even significantly below the Dax's current 22.6.

Volkswagen as the Samsung of e-mobility?

The valuation speaks for the Volkswagen and against the Tesla share. And for prices that continue to rise. According to Jose Asumendi, an analyst at J.P. Morgan, the valuation of VW shares will rise. And if investors trust the share to have a higher valuation, its price will also rise. Asumendi names a target of 266 euros, UBS even 300 euros. According to the bank's assessment, Volkswagen could become the co-market leader for e-mobility alongside Tesla, but not before next year and with the prospect of gaining further market shares.

But viewed in detail, Tesla does better: The gross margin as well as the operating margin are 21.02 and 6.3 percent higher than that of Volkswagen (18.0 and 4.3). In addition, the ratio of debt to equity at VW with a value of 158 is significantly higher than at Tesla with just 52.8. In relative terms, VW is thus more heavily indebted. If you also consider that Volkswagen will have to reduce capacities for vehicles with combustion engines in the medium term, even if no plans have yet been made for this, the profitability tends to speak in favor of Tesla.

However, this shouldn't encourage investors to buy Tesla stock now. To do this, the absurdly high valuation would first have to decline – either through massive leaps in profit or a decline in price. Then the Tesla share would be a good investment in a premium manufacturer of technologically leading e-cars, quasi in the Apple of e-mobility – unless Apple makes itself the Apple of e-mobility.

The Volkswagen share, on the other hand, is a bet on the mass market, on the fact that electric cars will push back the internal combustion engine and that the VW model ID.3 can follow in the footsteps of the Beetle and Golf, as the group hopes. Volkswagen would then be the Samsung of e-mobility, so to speak. In the long term, both stocks belong in a well-mixed portfolio. While you can currently buy Volkswagen, Tesla is still cautious because of the high valuation.

The article first appeared on Capital.de